Is long-term care insurance a waste of money?

Posted on: 06 September 2010 by Mark O'haire

When planning your retirement, you may have considered purchasing a long-term care policy to help address any medical expenses you might encounter during retirement.

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Someone recently sent me this message:

"A financial adviser at the bank has told me to take out long term care insurance and I wonder if it’s a bit of a waste of money. My husband died recently but I am worried that my estate might disappear in long term care costs."

This is a reasonably technical answer but stay with it, it will save you thousands.

Interestingly, long term care is a potentially more potent stealth tax than Inheritance tax. Whilst inheritance tax hits 40% of your estate over the nil rate band of £325,000, long term care could potentially take virtually all your wealth, and it starts at a much lower limit than £325,000.

There are a few options to consider before enduring the cost of long term care insurance, so I will lay them out for you:

I don’t know how your husband’s will was laid out so I’ll have to cover a few extra points here. Property ownership is typically held as either joint tenancy, or as tenants in common. If your husband’s ‘part ownership’ of the property was left to you under a joint tenancy, you will now own it in its entirety and your property will be brought into any calculations for long term care costs.

If it was held as tenants in common, you will now own a tenancy in your house along with the beneficiaries of your husband’s estate, which will typically be your children, or a trust. For the purpose of assessing your estate for payment of long term care costs, your tenancy in common is calculated as today’s open market value. Thankfully this is valued as zero so you can see the attraction.

If you had held your property as joint tenants, clearly all your property will fall into your estate. However all is not lost. Anyone can change the ownership of their property to tenants in common whilst they are alive, but if all beneficiaries are in agreement, you could create a deed of variation on your husband’s will to vary it and also to change the ownership to tenants in common. Your solicitor will organise this for you.

You could also hold your investments in the correct manner. For instance, certain investments are classed as a disregard and not included in your estate for long term care costs.

An insurance bond is disregarded. Within an insurance bond you can invest into pretty much what you would like e.g. cash, property, fixed interests, equities.

So you could invest into cash outside a bond and this investment would be included in long term care calculations or you could invest inside a bond and it would be disregarded.

Use a fee based Independent Financial Adviser for that as a commission based product is very expensive, and fees, as well as ‘hidden’ fees can easily topple 11%.

A fee based Independent Financial Adviser should be able to shave off most of those costs.

And so with a trip to your solicitor and a good fee based Independent Financial adviser, your estate should be well protected before you are lumbered with an expensive long term care insurance policy. Both advisers will also discuss with you the deliberate deprivation of capital rule which space prohibits here.

In my experience long term care costs average around £25,000 per year and nursing home costs around £35,000.

Some people like to insure against that cost, and with estimates that after age 80, 70% of us will need some sort of care, its easy to see why. Currently 140 people per day enter long term care.

Costs for long term care vary considerably but the insurance provider will consider your age, health, sex and also what type of cover you require. For example if you want an inflation proofed income and cover, you would naturally expect that to cost more than a plan that will pay out on a level basis.

I’ll cover the types of long term insurance care plans next week but in any event your Independent Financial Adviser should be able to assist with pricing.

By Peter McGahan

Need Expert Advice?

Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email info@wwfp.net.

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